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Running a business on credit – What are Accounts Receivable and Accounts Payable?

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Accounts receivable and accounts payable are accounting terms used to describe money owed by or to your business.

What are the accounts receivable?

Accounts receivable are the money owed to your company (by your customers) for any goods sold or service provided. Credit terms for the accounts receivable may vary from days, up to one financial year. Also, you need to record the data for the date of sale, debtor, amount, and due date.

What are the accounts payable?

Accounts payables are the money owed by you (to your suppliers) for any goods received or service provided. If your business has received goods in advance to the payments, your purchase should be recorded in your accounts payable file.

How do the businesses operate with accounts payables and accounts receivables?

Purchasing stocks or selling goods on credit is a standard business practice. Buying on credit ease the pressure on your cash-flow, and selling products and services on credit helps you to retain your regular customers.

An example of how accounts payables and accounts receivables work

Let us take a baker for an example. Baker needs flour and other ingredients to bake food. So, he will receive these ingredients on credit from his supplier. The credit terms are, the baker needs to settle his accounts payables to his supplier after a week from the date of purchase.

Then, this baker sells his baked goods to the nearby restaurants. The restaurants buy backed goods on credit too. Restaurants settle the credits to the baker in the next day, after they sell the baked goods.

Now, as you may have noticed, this method is beneficial for both the baker and the restaurant. They both will pay for their suppliers after they receive money from their customers. So, nothing goes out of their pockets. And, this eases the pressure on their cash-flow. Also, this method helps the ingredient supplier to the baker to keep the baker as a regular customer.

Keep a good track of your accounts payables and receivables files

By maintaining accurate records of your business’s accounts payables and receivables, you can,

  • Avoid the danger of losing track of your payments (e.g., getting unexpected dues, interests, paying the same invoice twice, etc.)
  • Avoid missing any payments from your customers.
  • Identify bad debtors

Featured Photo by Beatriz Pérez Moya on Unsplash, and edited by the Author.

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